4 Sources of Capital For Funding
There are many sources of capital including business angel investors, venture capital, crowdfunding and debt.
Business Angel Investors
Angel investors are usually entrepreneurs that run very profitable businesses of their own or retired businesspersons who have exited their businesses. Angel investors invest both their time and their money in new ventures. They like working with founders and businesses where they can add value from their networks.
Angel investors typically invest in companies where they are familiar with the industry in which the companies operate. Angel investors are normally the first investors in a company. This seed and startup funding is usually done by taking a minority equity investment in the company rather than debt. Most Angels will invest between $100,000 to $1M and often a group of Angel investors will collaborate and invest together to support larger funding rounds.
Angel investors obtain their deal flow from trusted sources including referrals from investment and corporate advisors, lawyers, accountants and other Angel investors. Some also join Angel associations. Other Angel investors also set up investment firms that may be referred to as Family Offices. These firms invest in a range of assets including property, funds and private equity.
Venture capital is a type of private equity that often invests in early-stage companies. Venture capital firms invest in companies in exchange for equity, typically a minority ownership stake. Venture capital firms invest between $1M to $50M depending on their fund size.
There are tens of thousands of venture capital firms worldwide and they each have their own investment mandates and focus. Some invest in early stage startups, whilst fewer at later stage. Additionally, some venture capital firms are industry vertical focused whilst others invest across all major industries.
Most venture capital firms received their funding from other investors that pooled their money into the fund. These investors are referred to as Limited Partners and the manager of the venture capital fund is referred to as the General Partner. The General Partner typically spends 3 to 4 years investing all of the money in their fund and then up to 6 years working with their portfolio companies to help them grow and scale.
Venture capital firms source their deal flow from direct referrals and corporate advisors, of the likes of Shape Capital. Many venture capital firms don’t even publish their contact details preferring to receive referrals rather than cold calls and emailed pitch decks.
Crowdfunding is the collection of small investments from a large number of individuals via the Internet to finance a business. Depending on local laws and geography, the investors can either be sophisticated high net worth investors or retail mum and dad investors or a mix of both.
Investors that participate in crowdfunding campaigns invest very small amounts of money at a time, often as small as $50. This ensures the investor can manage their risk, however for the company it means managing a large share register of investors that need to be kept informed on progress. This is one of the big differences between crowdfunding and other sources of funding such as angel investors and venture capital firms that make much larger investments.
Additionally, unlike angel investors and venture capital, crowdfunding investors do not provide any other strategic value to the company other than capital.
Debt as a capital source is a credit facility such as credit cards. This form of capital source is not preferred and is normally considered as the last option, particularly for startup businesses. However, this source of capital helps business people acquire capital without involving investors and giving up shares in your business.
Debt provided by financial institutions is often secured against other assets such as property. There are a number of new non-bank lending providers coming onto the market that provide new forms of financing including factoring, invoice financing and venture debt to name a few.
In this FREE report, we reveal the best way to find investors, the best way to pitch, the funding process, and our top 10 tips for raising capital.